REAL ESTATE FINANCE OPINION REPORT OF 2012

Transcription

1 REAL ESTATE FINANCE OPINION REPORT OF 2012 A Report of the American Bar Association Section of Real Property, Trust and Estate Law, Committee on Legal Opinions in Real Estate Transactions the American College of Real Estate Lawyers, Attorneys Opinions Committee the American College of Mortgage Attorneys, Opinions Committee This Report was prepared by the Joint Drafting Committee comprised of: David L. Miller, McLean, Virginia (Reporter); William B. Dunn, Detroit, Michigan (Co-Editor); Robert A. Thompson, San Francisco, California (Co-Editor); Edward N. Barad, Denver, Colorado; Kenneth P. Ezell, Jr., Nashville, Tennessee; Catherine T. Goldberg, Albuquerque, New Mexico; Kenneth M. Jacobson, Chicago, Illinois; Robert J. Krapf, Wilmington, Delaware; Edward J. Levin, Baltimore, Maryland; and Lydia C. Stefanowicz, Madison, New Jersey. The Joint Drafting Committee consists of members of the following committees (the Committees ): (1) the American Bar Association ( ABA ), Section of Real Property, Trust and Estate Law, Committee on Legal Opinions in Real Estate Transactions (the RPTE Committee ), Edward J. Levin, Chair; (2) the American College of Real Estate Lawyers, Attorneys Opinions Committee (the ACREL Committee ), Kenneth P. Ezell, Jr., Chair until December 31, 2011 and Catherine T. Goldberg, Chair thereafter; and (3) the American College of Mortgage Attorneys, Opinions Committee (the ACMA Committee ), Lydia C. Stefanowicz, Co-Chair. This Report does not render legal, tax, or accounting advice. This Report has not been adopted, approved, or endorsed by the governing bodies of the bar organizations of which the Committees are a part, or by any law firms or other entities. Further, this is a collaborative work reflecting an overall consensus of the Joint Drafting Committee and the Committees, but not necessarily reflecting the views of any given individual as to the treatment of any particular issue. The members of the Joint Drafting Committee and the Committees reserve the right to assert contrary or other positions with regard to the issues discussed in this Report. This Report is published at 47 REAL PROP. TR. & EST. J. 213 (2012).

2 TABLE OF CONTENTS CHAPTER ONE: AN INTRODUCTION TO THE REAL ESTATE FINANCE OPINION REPORT I. BACKGROUND... 1 II. PROFESSIONAL RESPONSIBILITY... 2 III. CUSTOMARY PRACTICE... 3 IV. REAL ESTATE OPINION GUIDELINES... 3 V. LENGTH... 4 VI. LOCAL COUNSEL OPINION LETTERS... 5 VII. ILLUSTRATIVE LANGUAGE OF AN OPINION LETTER... 5 VIII. RELATIONSHIP TO OTHER BAR REPORTS, COMMENTARY... 6 CHAPTER TWO: A PRACTITIONER S GUIDE TO THE REAL ESTATE FINANCE OPINION LETTER 0. PRELIMINARY MATTERS 0.1 Context Date Addressee Parties Captions... 7 I. BACKGROUND 1.0 Specific Role of Opinion Giver Transaction Documents Authority Documents Opinion Jurisdictions Scope of Review Reliance on Other Sources Without Investigation II. ASSUMPTIONS 2.1 Assumptions III. OPINIONS 3.1 Status Power Authorization Execution and Delivery Enforceability Form of Security Documents No Breach or Violation No Violation of Law Choice of Law Usury Legal Proceedings Confirmation IV. CERTAIN LIMITATIONS 4.1 Bankruptcy Exception Equitable Principles Exception Generic Enforceability Qualification, with Assurance Other Transaction-Related Qualifications Other General Qualifications Exclusions Knowledge i

3 V. USE OF THE OPINION LETTER 5.1 Use Effective Date; No Obligation to Update Governing Law Disclaimer of Implied Opinions Expression of Professional Judgment Signatures CHAPTER THREE: ILLUSTRATIVE LANGUAGE OF A REAL ESTATE FINANCE OPINION LETTER I. BACKGROUND 1.1 Transaction Documents Authority Documents Opinion Jurisdictions Scope of Review Reliance on Other Sources Without Investigation II. ASSUMPTIONS 2.1 Assumptions III. OPINIONS 3.1 Status Power Authorization Execution and Delivery Enforceability Form of Security Documents No Breach or Violation No Violation of Law Choice of Law Usury Legal Proceedings Confirmation IV. CERTAIN LIMITATIONS 4.1 Bankruptcy Exception Equitable Principles Exception Generic Enforceability Qualification, [with Assurance] Other Transaction-Related Qualifications Other General Qualifications Exclusions V. USE OF THIS OPINION LETTER 5.1 Use Effective Date; No Obligation to Update ii

4 CHAPTER ONE: AN INTRODUCTION TO THE REAL ESTATE FINANCE OPINION REPORT I. BACKGROUND This Real Estate Finance Opinion Report of 2012 updates and expands the Inclusive Real Estate Secured Transaction Opinion, 1 which was issued in 1998 by the RPTE Committee and the ACREL Committee. The Inclusive Opinion was centered on a sample form of an opinion letter, meaning, in that context and in this Report, a legal evaluation rendered in writing by a lawyer or law firm (the opinion giver) 2 to a third party (the opinion recipient) who is not a client of the opinion giver with respect to the subject matter of the evaluation, in a financing transaction secured by real estate in the United States. 3 By design, for its sample form of opinion letter, the Inclusive Opinion drew on only two reports: (i) the American Bar Association Third-Party Legal Opinion Report, including the Legal Opinion Accord, published in 1991, 4 and (ii) the report published in 1994, as a joint project of the RPTE Committee and the ACREL Committee, 5 which adapted the Accord for loans secured by real estate. The Accord Opinion Reports provided that opinion letters issued pursuant to them incorporated the Accord Opinion Reports by reference and thus would be deemed to contain all of the many and detailed operative provisions of the Accord Opinion Reports. Therefore, the parties to an opinion letter would have to look outside the text of such an Accord opinion letter, to the Accord Opinion Reports, to understand such an Accord opinion letter. In contrast, the intent of the Inclusive Opinion was to provide a form of an opinion letter that included within its four corners all of the principal opinion letter concepts in the Accord Opinion Reports. The Inclusive Opinion referred to this as one stop shopping because there was no need to look (or shop) outside the Inclusive Opinion to see the sources on which it was based. Accordingly, the Inclusive Opinion was intended to be an educational tool, providing a more accessible way to understand the two Accord Opinion Reports. The Inclusive Opinion was inclusive in the sense of including the principal concepts of those two Reports. By design, the inclusiveness of the Inclusive Opinion was limited; it did not go beyond the two Accord Opinion Reports. It never was intended to be inclusive in the sense of reflecting other reports or approaches to opinion letter practice or every aspect of customary practice. This updated Report goes beyond the Inclusive Opinion to reflect developments in opinion letter practice since the issuance of the Inclusive Opinion. Like the Inclusive Opinion, this Report is intended to be an educational tool and a framework for more general consideration of opinion letter issues. This Report is in 1 See JOINT ABA/ACREL COMMITTEE, INCLUSIVE REAL ESTATE SECURED TRANSACTION OPINION (Feb. 2, 1999), [hereinafter INCLUSIVE OPINION] 2 The opinion letter usually is rendered by a law firm, and the law firm, not an individual lawyer working on the opinion letter, is the opinion giver unless the opinion letter is rendered by a sole practitioner. 3 Section of Real Property, Probate, and Trust Law of the ABA, and ACREL, Report on Adaptation of the Legal Opinion Accord of the Section of Business Law of the American Bar Association for Real Estate Secured Transactions, 29 REAL PROP. PROB. &TR. J. 569, 578 (1994) [hereinafter ABA/ACREL Accord Adaptation Report], used the term real estate secured transaction or REST to refer to a transaction involving a lien on real estate to distinguish its subject matter from other transactions that might involve real estate but were not directly secured by a mortgage, deed of trust, or similar document. Like the 1994 report, this current Report is intended to address only financing transactions secured by real estate in the United States. 4 The Accord is part of the Third-Party Legal Opinion Report Including the Legal Opinion Accord of the Section of Business Law, American Bar Association, 47 BUS. LAW. 167 (1991) [hereinafter ABA Business Law Accord Report] (reprinted in 29 REAL PROP. PROB. & TR. J. 487 (1994)). Subsequent citations to that Report will refer to the edition reprinted in the Real Property, Probate and Trust Journal. 5 The ABA/ACREL Accord Adaptation Report, supra note 3, together with the ABA Business Law Accord Report, supra note 4, are referred to in this Report as the Accord Opinion Reports.

5 three parts: Chapter One, this Introduction; Chapter Two, a more detailed Guide; and Chapter Three, illustrative language of an opinion letter (the Illustrative Opinion Letter ). 6 II. PROFESSIONAL RESPONSIBILITY Many professional responsibility considerations apply to opinion letter practice. These considerations are introduced briefly in this section but are not discussed in depth in this Report. They include the need to obtain client consent to deliver an opinion letter; the protection of client confidences; the identification, appreciation, and resolution of conflicts of interest; and certain duties to third parties. The clients involved should consent to the rendering of the opinion letter. Such consent may be implied by the execution of a commitment letter, by an agreement that requires an opinion letter, or by the context. Model Rule 2.3(a) in effect on the date of this Report 7 allows a lawyer to provide an evaluation of a matter affecting a client for the use of another person if the lawyer reasonably believes that making the evaluation is compatible with other aspects of the lawyer s relationship with the client. This Rule states the ethical basis of third-party opinion practice. It is not uniform as adopted among the states, however. Rules in several jurisdictions require consent of the client after consultation to any evaluation by a lawyer of a matter for someone other than the client. 8 Model Rule 1.2(a) also permits a lawyer to take such action as is impliedly authorized to carry out the representation, premised on the lawyer s having consulted with the client about the means by which the client s interest is to be pursued, as required by Model Rule 1.4. Model Rule 2.3(b) requires the lawyer to obtain the client s informed consent if the lawyer knows or reasonably should know that providing the opinion would materially and adversely affect the client s interests. This could occur, for example, if the opinion negotiations would reveal to the opinion recipient that a material remedy is not available in the transaction documents as drafted. In that case, the opinion giver would need to have the client s consent to reveal that fact. Such consent may exist by implication under Model Rule 2.3(a), but whether it does may depend on the understanding between the lawyer and the client concerning the transaction. The opinion letter often will involve disclosure of confidential information. Similar to the rule requiring consent of the client to the rendering of the opinion letter, Model Rule 1.6 provides that disclosure of confidential information requires client consent unless the disclosure is impliedly authorized to carry out the representation (or in certain other limited contexts where disclosure without consent is authorized). Conflicts of interest among clients involved in a given transaction may give rise to a requirement under Model Rule 1.7 that the opinion giver obtain informed consent of each client involved in the transaction. For example, while the Illustrative Opinion Letter in Chapter Three below contemplates that the opinion giver represents both a borrower and a guarantor, this Report does not address, but notes with caution, the possibility that the interests of a borrower and a guarantor may not be aligned in every instance and conflicts of interest may arise in that context. The rules of professional conduct also address the truth of communications by lawyers. Model Rule 1.2(d) prohibits a lawyer from assisting a client in conduct the lawyer knows is fraudulent. Model Rule 4.1 prohibits a lawyer, in the course of representing a client, from knowingly making a false statement of a material fact or law to a third person. 6 See infra ch. 1, section VII for a discussion of the Illustrative Opinion Letter. 7 See MODEL RULES OF PROF L CONDUCT (2007) ( Model Rules ). 8 See William B. Dunn and Edward J. Levin, Ethical Conduct and Liability to Third Persons in Legal Opinions Practice, THE ACRELPAPERS 385 (ALI-ABA Fall 2002), 20to%20third%20persons.pdf. 2

6 Beyond the few principles discussed in this section, there are many rules of professional responsibility and ethics that are relevant to opinion letter practice. Practitioners should consider the professional and ethical rules and principles that are in effect in their jurisdictions. III. CUSTOMARY PRACTICE Among the developments in opinion letter practice has been the recognition of the importance of custom and practice, or, as it often is referred to in this context, customary practice. The Accord Opinion Reports were designed to be an agreed protocol; that is, in large part, the meaning of the opinion letters and the diligence required to provide such opinion letters were set out in written form in the Accord Opinion Reports. Customary practice takes a different approach. Under customary practice, the meaning of the words used in an opinion letter, and the diligence required to provide such an opinion letter, are determined by the customary practice of lawyers who give and receive such opinion letters. The Real Estate Opinion Guidelines 9 provide valuable guidance regarding customary real estate opinion letter practice. Criticisms of certain aspects of the customary practice approach include its potential lack of precision and the related concern that there may be regional, practice area, and other differences in customary practice across the country. It may not be possible to eliminate the lack of precision that concerns some, and it may not be possible to eliminate regional differences in customary practice. Nevertheless, published reports of bar associations and other professional groups provide some guidance as to the meaning of customary practice for different practice areas and geographical regions. The Customary Practice Statement, 10 which was approved by a large number of bar associations and other professional groups, including the Committees, provides a brief summary of the context of customary practice in which opinion letters are prepared and interpreted. IV. REAL ESTATE OPINION GUIDELINES This Report is not intended to replace the Real Estate Opinion Guidelines. As just one example, even though the accompanying Illustrative Opinion Letter language includes an enforceability opinion (Chapter Three, Paragraph 3.5), such an opinion may not always be appropriate. The Real Estate Opinion Guidelines note: The benefit of an opinion to the recipient should warrant the time and expense required to prepare it. In particular, opinions from borrower s counsel in intrastate transactions (or a multistate transaction for which the lender has retained its own local counsel for the purposes of advising it) with respect to the enforceability of loan documents prepared by the lender normally should not be necessary and may not be cost justified ACREL Attorneys Opinion Committee and ABA Section of Real Property, Probate and Trust Law Committee on Legal Opinions in Real Estate Transactions, Real Estate Opinion Letter Guidelines, 38 REAL PROP. PROB. & TR. J. 241 (2003) [hereinafter Real Estate Opinion Guidelines]. The Real Estate Opinion Guidelines refer to and adapt, for real estate opinion letters, the Committee on Legal Opinions of the Section of Business Law of the ABA, Guidelines for the Preparation of Closing Opinions, 57 BUS. LAW. 875 (2002) [hereinafter Business Opinion Guidelines]. 10 Statement on the Role of Customary Practice in the Preparation and Understanding of Third-Party Legal Opinions, 63 BUS. LAW (2008) [hereinafter Customary Practice Statement]. For a discussion of certain aspects of customary practice from the standpoint of a business lawyer, see Committee on Legal Opinions of the Section of Business Law of the ABA, Legal Opinion Principles 53 BUS. LAW. 831 (1998) [hereinafter Business Opinion Principles]. The Working Group on Legal Opinions and the Committee on Legal Opinions of the ABA Business Law Section have begun a project that will work with other bar associations and professional groups to identify the extent of consensus as to various statements in the Business Opinion Principles and other aspects of customary practice. Some members of the Committees are participating in that project. 11 Real Estate Opinion Guidelines, supra note 9, 1.2, at (internal citation and emphasis omitted). 3

7 V. LENGTH The illustrative opinion letter that accompanied the Accord was extremely short because it incorporated the Accord by reference. Using a short opinion letter allows the parties to check quickly any variations in a given opinion letter from the recognized source on which it is based. This approach in the Accord never received broad acceptance, perhaps because, as demonstrated by the Inclusive Opinion, behind the short-form of an Accord opinion letter lay the Accord Opinion Reports with a complex set of code-like interpretive rules that were, to say the least, challenging to master. To understand an Accord opinion letter, one would need to be conversant with the incorporation by the Accord Opinion Reports of assumptions, exceptions, exclusions, limitations, qualifications, disclaimers, definitions, principles, and other matters. This Report uses the term limitations as the broad term to encompass exceptions, exclusions, qualifications, and other limitations. Practitioners sometimes include assumptions as limitations and sometimes use a different catchall term to convey the broadest category of limitations of an opinion letter. 12 More recently, the Customary Practice Statement notes that customary opinion letter practice provides content to abbreviated opinion letter language, thus allowing shorter forms of opinion letters. The Customary Practice Statement, however, does not require short opinion letters. The questions remain: How short is too short? And, how much precision in language is necessary to convey the meanings of the words used in an opinion letter? These questions pertain particularly to stated assumptions and limitations. As is noted in further discussion in Chapter Two, many assumptions and limitations can be implied through customary practice. 13 Nevertheless, until customary practice that has established accepted and essential normative conduct in opinion practice has become so ingrained and judicially accepted that no arguable doubt can be cast on the effect of omission of an assumption or limitation, or unspoken limitation of diligence required to render an opinion, there is risk inherent at least procedurally in relying on customary practice to fill in the blanks. 14 Real estate finance lawyers tend to use lengthier opinion letters than are used by many of their counterparts in other business transactions. This may result in part from the nature of the type of transaction, but it also may result in part from viewing matters through a different lens than other business lawyers, and from the nuanced legal issues that attend a sophisticated real estate secured financing transaction. 12 Limitations, as that term is used in this Report, appear not just in Chapter Three, Article IV, but also in other sections of the Illustrative Opinion Letter. For further discussion see ROBERT A. THOMPSON, REAL ESTATE OPINION LETTER PRACTICE 82 (2d ed. 2009) [hereinafter THOMPSON]. 13 For a discussion of implicit assumptions, see DONALD W. GLAZER, SCOTT FITZGIBBON & STEVEN O. WEISE, GLAZER AND FITZGIBBON ON LEGAL OPINIONS: DRAFTING, INTERPRETING AND SUPPORTING CLOSING OPINIONS IN BUSINESS TRANSACTIONS (3d ed and Supp. 2011). That section refers to what it describes as a trend to streamline opinion letters by eliminating boilerplate. Implicit limitations are discussed throughout chapter nine of that treatise. 14 The value of reciting what to experienced practitioners may seem obviously implicit is demonstrated by the decision of the New York Supreme Court Appellate Division, First Department in Fortress Credit Corp. v. Dechert LLP, 934 N.Y.S.2d 119 (N.Y. App. Div. 2011). The court in Fortress ordered dismissal of the complaint, which alleged various breaches of duty arising from an opinion letter rendered by the Dechert LLP law firm in connection with a loan from Fortress Credit Corp., which was guaranteed by Marc Dreier. Id. at While the same outcome might well have resulted had there been a trial, with evidence of customary practice, the opinion language afforded an early advantage on the motion to dismiss, and trial was avoided. Among other grounds for dismissal, the court cited language in the opinion letter itself: Moreover, the opinion, by its very terms, provided only legal conclusions upon which plaintiffs could rely. The opinion was clearly and unequivocally circumscribed by the qualifications that defendant assumed the genuineness of all signatures and the authenticity of the documents, made no independent inquiry into the accuracy of the factual representations or certificates, and undertook no independent investigation in ascertaining those facts. Thus, defendant s statements as contained in the opinion, were not misrepresentations (see Prudential Ins. Co., 80 N.Y.2d at , 590 N.Y. S.2d 831, 605 N.E.2d 318). Id. at

8 Conversely, while supporting the use of somewhat longer opinion letters, the Committees recognize the opposite danger: that a lengthy opinion letter might give false comfort that it is completely comprehensive. As noted in the Customary Practice Statement, while an opinion letter might on the surface seem to be comprehensive, an opinion letter cannot express all of the gloss that customary practice will add to understanding an opinion letter. VI. LOCAL COUNSEL OPINION LETTERS This Report focuses on opinion letters of lead or sole counsel, not of local counsel. Although certain subjects are common to lead counsel and local counsel opinion letters, local counsel often are engaged to opine on discrete issues in complex multi-state financing transactions that are not discussed in this Report; and some opinions that are customary in lead counsel s opinion letter, such as entity formation, due authorization, and the like, are often not appropriate in a local counsel opinion letter. This Report does not purport to provide a comprehensive or focused resource for local counsel opinion letters a project yet to be undertaken. VII. ILLUSTRATIVE LANGUAGE OF AN OPINION LETTER The Illustrative Opinion Letter language included below in Chapter Three of this Report illustrates how some of the fundamental issues that arise in opinion letter practice in real estate secured transactions may be addressed. Preceding that, Chapter Two of this Report discusses many of the issues that arise in opinion letter practice. The specific opinion letter language included in this Report, however, calls for some important explanation and qualification. The purpose of including such language is not to prescribe, endorse, or in any way take a position as to what an appropriate opinion letter request might be or how any given issue should be expressed in an opinion letter. The inclusion of specific language is intended merely to put in a concrete context the consideration and discussion of issues that arise in certain opinion letter requests and responses. In preparing the accompanying Illustrative Opinion Letter language, the Committees began with the language of the ABA/ACREL Inclusive Opinion, which, in turn, was based on the two Accord Opinion Reports. The ABA Business Law Accord Report itself has been effectively abandoned by its original author and sponsor, the ABA Business Law Section. As a result, many lawyers consider the Accord Opinion Reports and the Inclusive Opinion to be outdated. The reasons the Committees have chosen, nonetheless, to use this approach of updating the Inclusive Opinion to prepare this exemplar are that (i) the Inclusive Opinion is the only example of an opinion letter that has been widely read and commented on by a national real estate legal audience, (ii) it raises many of the same issues and requests commonly found in opinion practice that this Report addresses, and (iii) it offers a structure and terminology that commonly are used in existing real estate finance opinion practice. The Committees do not recommend or endorse the Illustrative Opinion Letter as a model form. To the contrary, the Committees recognize that the form of opinion letter requested or offered by lawyers and law firms is a function and product of a variety of circumstances, including regional and local customary practice, which may vary among states, regions, firms, lawyers, clients, and transactions, and over time. Stated differently, while several state or local bar associations and professional groups have successfully pursued the development of model forms of opinion letters generally accepted by lawyers in their respective jurisdictions, a generally agreed-upon standard form of opinion letter for interstate transactions has not been achieved, and perhaps predictably and appropriately so. Customary practice in an interstate setting should be viewed as at best an emerging consensus as to how opinion letter parties respond to certain concepts and issues, and not, in the foreseeable future, as an effort to create comprehensive, nationally uniform opinion letter language or scope. 5

9 The Illustrative Opinion Letter language provided with this Report uses as its paradigm a commercial loan secured by a mortgage, deed of trust, or similar document encumbering real property a real estate secured transaction with a guaranty, and it is written as if given by the borrower s lead counsel in the transaction. It is not designed for local counsel opinions, where additional assumptions and limitations will be appropriate. The Illustrative Opinion Letter language includes many assumptions and limitations that the Committees believe would be implied by customary practice even if not expressly stated. By including in the Illustrative Opinion Letter language such customarily implied assumptions and limitations, the Committees intend to facilitate the consideration of issues that might otherwise go unnoticed in some contexts, but the Committees do not intend to diminish the convention that any such assumptions or limitations would be implied where not expressly stated. The basic structure of an opinion letter usually includes (i) the name of the party who is intended to rely on the opinions expressed; (ii) a description of the role and of the diligence of the opinion giver in reviewing documents and ascertaining facts necessary to render the opinions, and any limitations of that diligence, including reliance on information supplied by others; (iii) assumptions of facts, or mixed factual and legal matters, where facts have not been independently ascertained or the legal matters are extraneous to the opinion; (iv) opinions about the legal effect of the documents and facts of the transaction based on the diligence and assumptions of the opinion giver; (v) limitations to legal conclusions expressed as the opinions; and (vi) other conditions or limitations to use of the opinion letter, such as restrictions on reliance. The material in this Report follows this structural flow. The order of the presentation can be varied at will, although the purpose of each element should not be overlooked. VIII. RELATIONSHIP TO OTHER BAR REPORTS, COMMENTARY This Report is a product of collaborative effort of members of the bar in many jurisdictions, and consideration by committees of three national professional associations. As such, it may serve to represent some consensus among practitioners representing both opinion recipients and opinion givers, although it may not speak officially on anyone s behalf. The existence of numerous reports of state and local bar associations, treatises, and articles provides some harmonious but also some discordant views of opinion letter practice. State and local bar reports inform the practitioner and influence the practice within a jurisdiction, even enunciating customary practice within that jurisdiction. Although these reports provide thoughtful viewpoints worth consideration generally, they create potentially disparate understandings and negotiating positions that can impede interstate opinion letter practice, as common ground is uncertain. In addition to being, as noted above, an educational tool and a general framework, this Report describes how the profession has moved toward common understandings on the subjects considered. This Report is intended to assist in identifying potentially agreeable, nationally applicable standards, which may thereby bridge the particularities among local and state practices in multi-state transactions and even, perhaps, suggest standardization of intra-state practices. 6

10 CHAPTER TWO: A PRACTITIONER S GUIDE TO THE REAL ESTATE FINANCE OPINION LETTER 0.1 Context. This Guide, Chapter Two, discusses in some detail many of the common issues that arise in a lead counsel s opinion letter in a secured real estate financing. For convenience and context, the numbered paragraphs in this Guide correspond to the numbered paragraphs in the Illustrative Opinion Letter below in Chapter Three. Despite the references in this Guide to the Illustrative Opinion Letter, the Committees intend this Guide to apply broadly to opinion letters within the scope of this Report no matter what form they take. 0.2 Date. The opinion letter ordinarily is dated the date of the closing. As the practice has transitioned to a norm where face-to-face closings occur with declining frequency, opinion letters sometimes are dated the closing date and submitted in advance with an appropriate transmittal letter or authorizing release upon satisfaction of certain conditions. Some opinion givers prefer to deliver their opinion letters only upon closing. Regardless of when it is delivered or released, the opinion letter speaks only to matters as of its date. 0.3 Addressee. The precise addressee or addressees should be named carefully because that ordinarily will govern who may rely on the opinion letter. See Paragraph 5.1 as to reliance. 0.4 Parties. Where an opinion letter covers a principal obligor (the borrower) and a surety (the guarantor) they may be referred to collectively, for convenience, by a term such as Credit Parties. The Illustrative Opinion Letter does not use a collective term. Although some assumptions, opinions, and limitations apply similarly to both, not all do, and use of a collective term could lead to unintended statements. As noted in Chapter One, Part II, the interests of the borrower and guarantor may differ. It is not unusual for separate opinion paragraphs to be provided for each of the parties for whom an opinion is provided. 0.5 Captions. The Illustrative Opinion Letter includes captions at the start of each section and paragraph. The captions are for convenient reference and not intended to give meaning to the text. Many practitioners prefer not to include captions in their opinion letters. I. BACKGROUND 1.0 Specific Role of Opinion Giver. The opinion giver should, if appropriate, describe its limited or special role in the transaction that is the subject of the opinion letter. Opinion givers sometimes refer to themselves as special counsel, but this may be ambiguous and has no intrinsic meaning. 15 The absence of words such as special modifying the word counsel should not be construed to imply a broader role, or greater expertise or knowledge, than that stated in the opinion letter. 1.1 Transaction Documents. (a) An opinion letter should identify specifically any operative documents about which an opinion is to be rendered. Paragraph 1.1 of the Illustrative Opinion Letter language shows examples of documents commonly used in real estate secured transactions and defines them as Transaction Documents for purposes of reference in the opinion regarding enforceability of those documents, in the enforceability opinion, and in other specific opinions. As to the scope of review, see discussion Paragraph 1.4. (b) If a guaranty is to be one of the transaction documents that are the subject of the enforceability opinion, counsel should consider the particular issues raised as well as any additional assumptions and limitations that would be appropriate. Examples of such limitations might include principles of cases or statutes in a given state that, unless they can be and have been validly waived, might exonerate a surety due to modification of the original obligation of the principal without the consent of the surety; election of remedies; 15 Although lead counsel may wish to define its role clearly, beyond use of a term such as special counsel, limitation of role is more commonly expected in opinions of local counsel or of lawyers retained for a limited opinion on a specific legal matter. 7

11 actions materially prejudicial to the surety, without notice; or if suit or other remedies against the principal are not pursued first, or simultaneously with those against the surety, to the extent required in that state. Similar considerations apply to indemnities by a party other than the borrower under an environmental or other indemnity agreement. Most of these possible limitations are covered by the equitable principles exception and the generic enforceability qualification in discussion Paragraphs 4.2 and 4.3. (c) Financing statements normally would not be included in the specified transaction documents as to which core 16 opinions are rendered. In opinion letters where financing statements and other Uniform Commercial Code ( U.C.C. ) issues are covered, it is common to identify, in the list of documents reviewed by the opinion giver (but, again, not as specified transaction documents to be opined about), individual financing statements and where they are filed or to be filed, and other applicable matters. See discussion Paragraph Authority Documents. (a) Some opinion givers prefer to identify each of the organizational and other specified authority documents reviewed, as the language in the text of the Illustrative Opinion Letter does, while others prefer to refer in more general terms to some or all of such documents. Unlike the transaction documents, which should be identified specifically, it is a matter of personal preference whether to identify specific authority documents reviewed. See discussion Paragraph 1.4(b) regarding the scope of review. (b) If direct or indirect constituent member entities of the borrower or the guarantor are to be addressed, their organizational documents, consents, and the like, should be reviewed by the opinion giver, and (if authority documents are being listed) should be identified in the opinion letter along with the other authority documents. See discussion Paragraph 3.3(b). (c) Practitioners should be careful to note the correct title of documents obtained from public authorities, called public authority documents. For example, in some places, certifications using the words good standing are provided by state officials; in others, the words good standing do not appear in the certifications. See discussion Paragraph Opinion Jurisdictions. (a) In this Report, law refers broadly to the statutes, the judicial and administrative decisions, and the policies, rules, and regulations duly promulgated by governmental agencies and instrumentalities. Opinion letters sometimes use a more limited definition. Importantly, an opinion letter should specify which law it covers, as in Paragraph 1.3 of the Illustrative Opinion Letter, and the opinion letter may identify laws and legal issues that it excludes, as in Paragraph 4.6 of the Illustrative Opinion Letter. Covered law normally would include law of the state governing the transaction documents and the state of formation of each of the borrower and the guarantor. (b) There appears to be a trend in real estate secured financing opinion letter practice to exclude coverage of federal law except where expressly identified federal law is relevant to the transaction or the parties. Federal law sometimes is stated to be included in opinion letters even though, after taking account of exclusions of the kind set forth in Paragraph 4.6 of the Illustrative Opinion Letter, it is difficult to identify any federal law that would be relevant in opinion letters given in most real estate secured transactions. If any federal law is to be considered, it should be identified and covered expressly; otherwise, no coverage of federal law should be implied or generally referred to. Federal law should be covered only if there is a reason to do so, such as if a federal issue is material to the transaction. To avoid any risk of misunderstanding, however, the Illustrative Opinion Letter language follows the general practice of expressly excluding bankruptcy and similar law pertaining to creditors rights even though many are federal and excluded already. 16 Core opinions are those relating to formation of the contract and its enforceability. See discussion infra ch. 2, paras

12 (c) If the borrower or the guarantor is an entity formed other than in the state whose law governs the transaction documents, then the opinion letter either should expressly address the entity law of the state of formation or should expressly assume compliance with such entity law. Of course, an opinion as to the entity law of another state should be considered carefully by the opinion giver, as it requires understanding of the entity law of the state of formation and of issues involving multi-jurisdictional practice. In addition, such opinions can be complex, as it is not always clear what applicable law is the basis of the opinions, and opinion recipients may have specific expectations of the scope of such opinions. For example, an opinion letter addressing such entity law sometimes will refer to a specific entity statute. In such a case, the opinion giver should consider whether the opinion letter is intended to address law of the state of formation other than the named statute, such as the case law interpreting the named statute or the law of contracts in the state of formation. In these cases, the opinion giver should consider specifying what law is intended to be addressed, such as the contractual aspects of the operating agreement governing the entity, and including any necessary assumptions about any such law that is not intended to be addressed in the opinion letter. By being clear as to the scope of the entity law being considered, the opinion giver is also providing the opinion recipient with the necessary information to allow the opinion recipient to determine whether to accept an opinion that is limited as indicated. (d) The law of multiple jurisdictions may need to be considered in the opinion letter as appropriate. Opinions with respect to entity, transactional, or other issues governed by law of jurisdictions where the opinion giver does not practice may need to be covered by an appropriate assumption as to such law or, if necessary, by engaging other counsel to opine as to such law. By including separate terms for Opinion Jurisdictions and State, the Illustrative Opinion Letter language includes certain coverage limitations that might appropriately be specified in multi-state transactions. Where only one state is involved, an opinion letter normally would use only one term, such as State, to describe which law is addressed. (e) By customary practice, an opinion letter covers only law that a lawyer in the jurisdiction or jurisdictions whose law is being covered by the opinion letter, exercising customary professional diligence, would reasonably be expected to recognize as being applicable to the entity, transaction, or agreements to which the opinion letter relates. 17 (f) If the borrower or the guarantor is a regulated entity or participates in government programs, additional limitations may be appropriate when the need for governmental consents or approvals is the subject of an opinion or a necessary predicate to an opinion contained in the opinion letter. 1.4 Scope of Review. (a) Opinion letters often include statements to the effect that, in addition to identified documents, the opinion giver has reviewed such matters as are necessary in the professional judgment of the opinion giver to render the opinion. Customary practice dictates that the opinion giver has undertaken a review of what is necessary to render the opinion letter. 18 Such a statement, therefore, is unnecessary in the opinion letter, but an example nevertheless is included in Paragraph 1.4 of the Illustrative Opinion Letter. (b) The opinion giver may limit the scope of inquiry to specific documents or other specific items, but such a limitation is effective only if it is explicit; e.g., we have reviewed only the following documents and made no other investigation or inquiry. Recitation of a list of documents without an express limitation as to the scope of review should not be relied upon as being effective to limit the scope of review. For this reason, the language in Paragraph 1.4 of the Illustrative Opinion Letter, if not changed, will be insufficient to limit the 17 This statement of what law is covered follows the formulation set forth in Business Opinion Principles, supra note 10, II.B, at Accord section 2 says: The Opinion Recipient may assume that the Opinion Giver has reviewed such documents and given consideration to such matters of law and fact (in accordance with the principles set forth in this Accord) as the Opinion Giver has deemed appropriate, in its professional judgment, to render the Opinion. ABA Business Law Accord Report, supra note 4, 2, at 504 (emphasis omitted). 9

13 scope of review to specific documents. However, limitation of the scope of review as to a given issue, such as relying solely on our review of the good standing certificate of borrower issued by the State, the borrower is in good standing under the general corporation law of the State, is effective as a limitation of the opinion giver s duty as to the stated issue. (c) On occasion, an opinion recipient might request that the opinion giver list in the opinion letter, as reviewed, transaction documents as to which the opinion giver is not providing any opinions and that are not otherwise necessary to support the express opinions that are being given. The opinion giver should not be expected to identify as reviewed any such documents. If any such documents are reviewed, whether at the request of the opinion recipient or at the election of the opinion giver, and whether or not identified in the opinion letter as reviewed, the opinion recipient should not infer from such review or identification that any opinions on those documents are implied by the opinion letter. 1.5 Reliance on Other Sources Without Investigation. (a) The opinion giver may rely, without additional investigation, on information provided by others, including public authority documents and factual confirmations provided in client certificates and in transaction documents, unless the opinion giver has actual knowledge that the information is false or the opinion giver does not reasonably believe that the source is appropriate. 19 Although such reliance would be within customary practice, a statement of such reliance is recommended. (b) A related concept addresses misleading opinions. Section 1.5 of the Business Opinion Guidelines (and as included in the Real Estate Opinion Guidelines), says: An opinion giver should not render an opinion that the opinion giver recognizes will mislead the recipient with regard to the matters addressed by the opinions given. (c) Because certain aspects of the opinion letter may be based on the knowledge of the opinion giver, many opinion givers choose to define knowledge for purposes of the opinion letter. See Paragraph 4.7 below. (d) Unjustified reliance is to be contrasted with the situation where reliance on assumptions that are contrary to fact is agreed upon to facilitate a given opinion and therefore is appropriate: if the opinion giver and recipient agree to an express hypothetical assumption contrary to facts (e.g., transaction documents are governed by New York law notwithstanding a contrary choice of law provision), which makes clear that the opinion giver is not stating whether it is reasonable to assume the assumed hypothetical fact. Sometimes opinion givers will phrase these hypothetical assumptions as being made with the permission of the opinion recipient. (e) The Accord, 4, and the Business Opinion Principles, III.C, provide that a legal opinion should not be based on an assumption or factual representation that is tantamount to the legal opinion being expressed other than legal conclusions in a certificate of a government official. The exact line between fact 19 Sources vary in their descriptions of what information should not be relied upon, and some appear to expand the field of unjustified reliance to information the user should deduce to be unreliable even when furnished by an otherwise reliable source. Accord section 3 states that an opinion giver may rely without investigation on information provided by others only if (among other things) the provider of the information is reasonably believed by the Opinion Giver to be an appropriate source for the information. Id. at 505. Accord section 5 states: As a general and overarching principle, the Opinion Giver may not rely on information (including certificates or other documentation) or assumptions, otherwise appropriate in the circumstances, if the Opinion Giver has Actual Knowledge that the information or assumptions are false or the Opinion Giver has Actual Knowledge of facts that under the circumstances would make the reliance unreasonable. Id. at 513. The Business Opinion Principles, supra note 10, III.A, at 833, provides: Customary practice permits such reliance [on factual information obtained from others] unless the factual information on which the lawyers preparing the opinion letter are relying appears to be irregular on its face or has been provided by an inappropriate source. The difference between having knowledge that would make reliance unreasonable and the facial appearance of irregularity may be significant (emphasis within original quotations omitted). 10

14 and law may not always be an obvious one. See discussion Paragraph 3.11(a) below as to a factual confirmation. (f) If certain legal issues that are not addressed in a given opinion letter are addressed in another opinion letter separately provided to the opinion recipient by another counsel, then it is preferable for the opinion giver to assume the issues as necessary for its opinion letter rather than for the opinion giver to rely on the opinion letter of the other counsel or otherwise to provide a conduit opinion letter in stated reliance on another opinion letter. 20 In the unusual case where the opinion giver obtains legal advice from other counsel on which the opinion giver s own opinion letter is based, there is no need to indicate reliance on such advice. 2.1 Assumptions. II. ASSUMPTIONS (a) Opinion letters usually identify assumptions that support the opinions given, but the practice of determining which assumptions are stated in opinion letters and which assumptions should be implied as a matter of customary practice is inconsistent. Paragraph 2.1 of the Illustrative Opinion Letter includes assumptions that are common in opinion letter practice, but not all of the assumptions stated there need be included in all opinion letters. Most of the assumptions are relatively self-explanatory; however, some warrant further commentary. Those listed are commonly understood and accepted. If they are not responsive to an opinion recipient s request, the recipient would need to make that known and justify variance. (b) Assumptions are made without investigation, whether or not the opinion letter expressly so states. The same principles governing justifiable reliance discussed above in Paragraphs 1.5(a) and (b) apply to assumptions, which form additional factual bases for the opinions expressed in the opinion letter. That is, the opinion giver may rely, without additional investigation, on assumptions unless the opinion giver has actual knowledge that the assumed information is false or will mislead the opinion recipient. (c) Customary practice implies the assumptions stated in the language of Paragraph 2.1(a) (o) of the Illustrative Opinion Letter, whether or not expressly stated. The practice of reciting implied assumptions is inconsistent. Not all those recited in the Illustrative Opinion Letter necessarily apply to every opinion, although each of them relates to the scope of a lead counsel opinion. On the other hand, an opinion giver may choose to add additional assumptions, depending on the specific circumstances, the role of the opinion giver (e.g., local counsel; see Chapter One, Part VI), the terms of the transaction documents, and the nature of the opinions being rendered. The apparent comprehensiveness of the assumptions set forth in the language of Paragraph 2.1(a) (o) of the Illustrative Opinion Letter should not be construed as suggesting that others that may be implied by customary practice (or others stated elsewhere in the opinion letter) are not applicable; nor should anything within the stated assumptions imply in any way any expansion of the scope of the opinions set forth elsewhere in the Illustrative Opinion Letter language. Although certain assumptions may be implicit, as discussed in Chapter One, Part V, recitation of them makes their inclusion clear and may serve an evidentiary purpose. (d) Most opinion letters assume that all signatures are genuine, as stated in the language of Paragraph 2.1(e) of the Illustrative Opinion Letter. Opinion recipients occasionally request that an assumption that signatures are genuine not apply to signatures on behalf of the borrower or the guarantor. In effect, such a request might be construed to require the opinion giver to assure that the signatures of the opinion giver s clients are not forgeries and that the persons signing are in fact the persons they purport to be. Such an assurance is not an opinion of law but is a matter of a fact that is outside of the knowledge and professional competence of the opinion giver. Even familiarity with the signatory over years of representation may not necessarily support a factual determination that, as a legal certainty, the person is who the person purports to be. As noted above in discussion Paragraphs 1.5(a) and 2.1(b) concerning assumptions generally, assuming 20 For further discussion, see THOMPSON, supra note 12, at